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Mysteries are just a part of life. No matter how many years you might spend on this planet, you will never get satisfactory answers to all of those pesky, nagging queries that keep you up at night. But take heart: In the space of just a few brief minutes of reading, you will have the resolution to one pressing inquiry that may have kept you awake on a night or two: what are actuaries and why are they messing with my insurance rates?

Actually, there are two separate components involved in this issue. First, you need to understand the nature of an actuary’s job, and yes, it is a real career choice. In short, an actuary is a college-educated business professional who is trained to analyze risk and to assess its financial consequences. The tools he uses are not hammers or saws; they are the more cerebral implements of statistics, mathematics and financial theory. He wields these tools to examine unlikely future events and to assess the likelihood that they will happen. Entities such as insurance companies and pension programs deal in these uncertainties every day. In fact, it is incumbent on them to grasp these variables in order to determine the risk involved in providing coverage to a particular group such as people of a certain age, profession or health status.

Although they might operate behind the scenes in some respects, actuaries are a vital part of the management teams of the companies for whom they work. This is partly because they don’t just analyze possibilities from the anesthetized safety of an ivory tower; they use what they have estimated in order to reduce the likelihood and impact of the adverse events that they have predicted. In order to do that, they must possess a keenly developed skill set, including the ability to understand human behavior, to analyze data thoroughly and to use advanced business acumen. Their talents and expertise make them prized employees in industries such as life insurance, retirement systems, property and casualty insurance companies and investment and financial management firms.

If all of this sounds too abstract, let’s consider an example. An actuary employed in the property and casualty insurance field is responsible for figuring out the estimated number of claims that will result from automobile accidents. In order to assess what an individual would pay for accident insurance, the actuary would consider factors such as the person’s age, sex, driving history and type of car, among other things. It is also the actuary’s job to make sure that the premiums that the insurer charges strike a careful balance, enough to cover the insurance company’s costs but not so high that they are not competitive. To use another example, actuaries are vital parts of the life and health insurance fields, helping to create the policies they sell by predicting the likelihood of chronic illnesses such as diabetes, cancer, stroke and heart disease among a segment of the population that shares commonalities such as geographic proximity or age.

Assessing Risk

Actuaries also have an important role to play in the corporate world. They help corporate CEOs and boards assess risk. In addition, they can provide valuable data that can aid company decision makers in shaping future policies, including whether the company should expand in a particular direction. As corporations scope out their long-term strategic plans, information from actuaries about estimated projected pension costs can help them to allocate the proper amount of funds into these programs. By doing so, they can ensure that retirees have the financial benefits they have worked so hard to receive. Once in a while, actuaries may also be asked to testify in court. An example of a situation that would merit this could occur in the case of determining the value of the potential lifetime earnings of someone who was disabled or killed on the job.

These tasks are complex, requiring a higher understanding of mathematics and general business. For that reason, people entering this field should have a strong academic background in these areas. Generally, actuaries’ undergraduate degrees will be in mathematics, statistics or actuarial sciences. They should complete courses in corporate finance, applied statistics and economics. Getting a career-based internship is also very desirable. Before being hired at her first job in this career, an aspiring professional in this field is increasingly being required to take and pass the actuarial exam. One of the most important on-going responsibilities of an actuary throughout his career is to keep up with current economic and social trends as well as insurance-related legislation that is passed.

Actuaries And Insurnace Rates

That brings us to the other half of your original question of the relationship between actuaries and the insurance rates for your business, your home and even your life. It boils down to this: Actuarial science is a dynamic field of study. As financial norms, business practices and innovations in medicine occur, actuarial professionals are constantly tweaking their predictions to ensure that the balance of risk and returns is struck. Insurance works by spreading the risk among the diverse group of policyholders. The higher your risk is calculated to be, the higher your premiums will typically become. If your policy rates begin to climb precipitously, it may be because you are now at an increased level of risk. A common example of this situation occurs after you have an automobile accident or after your home sustains flood or storm damage. Often, you will notice that your premium will be increased the next time it comes up for renewal. In effect, these are examples of how and why actuaries are “messing with” your insurance rates.

In many ways, it might come as a relief to know that insurers heavily rely on input from actuaries whenever changes in policies or rates occur. The techniques of these highly-educated business professionals are not based on whim or subjective emotion; they are steeped in higher mathematics, probability and statistical theory. Although it might be tempting to feel singled out when your rates rise, rest assured that it isn’t. In reality, your rate increase is nothing more or less than the result of an actuary’s exacting number crunching.